Debt Loans

The likelihood that a family will use a payday loan increases if they are unbanked, or lack access to a traditional deposit bank account. In an American context the families who will use a payday loan are disproportionately either of black or Hispanic descent, recent immigrants, and/or under-educated.These individuals are least able to secure normal, lower-interest-rate forms of loans credit.

The payday lending industry argues that conventional interest rates for lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would generate only 38 cents of interest, which would fail to match loans processing costs. Research shows that on average, payday loans prices moved upward, and that such moves were “consistent with implicit collusion facilitated by price focal points”.[29]

In many cases, borrowers write a post-dated check (check with a future date) to the lender; if the borrowers don’t have enough money loans in their account, their check will bounce.

Since payday lending operations charge higher interest-rates loans than traditional banks, they have the effect of depleting the assets of low-income communities. The Insight Center, a consumer advocacy group, reported in 2013 that payday loans lending cost U.S communities $774 million a year.

Absent higher delinquency, the extra credit from payday loans lenders does not fit our definition of predatory.” The caveat to this is that with a term of under 30 days there are no payments, and the lender is more than willing to roll the loan over at the end of the period upon payment of another fee. The report goes on to note that payday loans are extremely expensive, and borrowers who take a payday loan are at a disadvantage in comparison to the lender, a reversal of the normal consumer lending information asymmetry, where the lender must underwrite the loan to assess creditworthiness.

In an analysis of the Texas payday lending industry, Michael Garemko notes that payday loans appear to exist in a classic loans market failure. In a perfect market of competing sellers and buyers seeking to trade in a rational manner pricing fluctuates based on the capacity of the market. Payday lenders have no incentive to price their loans competitively since loans are not capable of being patented. Thus, if a loans lender chooses to innovate and reduce cost to borrowers in order to secure a larger share of the market the competing lenders will instantly do the same, negating the effect. For this reasons all lenders in the payday marketplace charge at or very near the maximum fees and rates allowed by local law.

Michael Garemko notes in his research on the Texas payday industry that while it is difficult to quantify the impact on specific consumers there are external parties who are clearly affected. Most directly impacted are the holders of other low interest debt from the same borrower, which now is less likely to be paid off since the limited income is first used to pay loans the fee associated with the payday loan. The external costs of this product can be expanded to include the businesses that are not patronized by the cash strapped payday loans customer to the children and family who are left with fewer resources than before the loan. Garemko argues that the external costs alone, forced on people given no choice in the matter, are enough justification for stronger regulation even were we to assume the borrower themselves understood the full implication of their decision to seek a payday loan.

In May 2008 the debt charity Credit Action made a complaint to the UK Office of Fair Trading (OFT) that payday loans lenders were placing advertising on the social network website Facebook, which violates advertising regulations. The main complaint was that the APR was either not displayed at all or not displayed prominently enough, which is clearly required by UK loans advertising standards.

In US law, a payday lender can use only the same industry standard collection practices used to collect other debts, specifically standards listed under the Fair Debt Collection Practices Act. The FDCPA prohibits debt loans collectors from using abusive, unfair, and deceptive practices to collect from loans debtors. Such practices include calling before 8 o’clock in the morning or after 9 o’clock at night, or calling debtors at work.